Daily currency analysis
The dollar found support close to 1.47 against the dollar in European trading on Wednesday and strengthened to near 1.4650 ahead of the US data. Following the US releases, the US currency weakened to lows near 1.4750 before a recovery to 1.4720.
The US ISM index for the manufacturing sector dipped sharply to 47.7 for December from 50.8 previously. This was the first reading below 50 for 11 months and the lowest since April 2003. The components were all generally negative except for the prices index which rose to 68.0 from 67.5 previously.
The weak data will increase fears that the economy is sliding towards recession and will also increase pressure for further cuts in interest rates. Futures markets moved to price in a 50% probability of a 0.50% Fed Funds rate cut at the January meeting.
The FOMC minutes from December’s meeting stated that conditions were unusually uncertain. Members noted that the credit and economic risks may require substantial easing while there had been a marked deceleration in consumer spending. The minutes will certainly reinforce expectations of an interest rate cut this month.
The revised Euro-zone PMI index was little changed at 52.5 for December while the Spanish index moved to below the 50.0 level for the first time in over two years. There will still be underlying concerns over Euro-zone growth trends which will hamper the Euro.
The yen found support stronger than the 112.0 level on Wednesday and strengthened sharply to 109.30 in US trading with the Japanese currency also securing wider gains against most major currencies.
Plans by the Kuwaiti sovereign fund to invest in the US banking sector curbed strong yen buying in Asian trading on Wednesday, but there was then an exodus from carry trades, especially after the poor US data as stock markets fell.
Japanese markets will be closed for holidays until January 4th. With domestic investors absent, any drop in retail yen selling would provide initial support to the Japanese currency. The attitude of retail investors towards foreign bonds and carry trades will also be very important for the yen during January as a whole.
The Chinese yuan strengthened further on Wednesday with a fresh record high against the US dollar and there is some evidence that the central bank is encouraging a faster pace of currency appreciation. A stronger yuan will provide some background yen support.
The UK currency came under fresh pressure on Wednesday following the New Year break with fresh record lows beyond 0.7445 against the Euro. The UK currency also suffered net losses against the dollar even though the US currency was generally weaker and consolidated around 1.98.
Overall Sterling confidence is likely to remain fragile on growth fears. The PMI index for the manufacturing index fell to 52.9 in December from 54.4 which will reinforce expectations of an industrial slowdown. The services-sector index will be more important on Friday and a weak reading would increase pressure for lower interest rates, especially if the prices index is lower.
Trading statements from UK retailers will be watched closely in the short term. Any evidence of firm UK consumer spending during the holiday period would discourage a January Bank of England rate cut, especially as Libor rates have eased further.
The franc retained a robust tone on Wednesday, strengthening to highs near 1.1150 against the US dollar and 1.6430 against the Euro.
There was an increase in risk aversion during the day, especially after the poor US data, and this helped the Swiss currency. The fact that global equity markets were significantly weaker on the first trading day of 2008 also underpinned the Swiss currency
The PMI data for Switzerland will be watched closely on Thursday with a particular focus on the performance relative to the Euro-zone. A sharp slowdown would increase doubts over Swiss growth, although risk conditions will tend to dominate for now.
The Australian dollar pushed back towards 0.88 against the US currency in local trading on Wednesday. A solid reading for the PMI report helped underpin yield support with expectations of a February interest rate increase.
There will still be concerns over global growth developments which will curb Australian dollar support while underlying risk aversion levels have also increased which will tend to undermine speculative capital inflows. Overall, the Australian dollar will find it difficult to make much headway, although it held relatively firm in US trading on Wednesday.